Question 1

If group auditors make no reference to component auditors whose work they have relied on as a part of the basis for their report, the group auditors:

Accepted Answer

When group auditors make no reference to component auditors whose work they have relied on, they are assuming full responsibility for the work of the component auditors. This means they are treating the work as if it were their own and do not distinguish it in their report.

Question 2

After performing all necessary procedures, the predecessor auditors reissue a prior-period report on financial statements at the request of the client without revising the original wording. The predecessor auditors should:

Accepted Answer

The predecessor auditors should use the date of the previous report when reissuing the prior-period report without revising the original wording. This is because the report reflects the auditor's opinion at the time the original report was issued, and reissuing the report with a new date may mislead users of the financial statements. Dual-dating or using the reissue date are alternatives when there are substantive changes made to the original report.

Question 3

An audit client has refused to allow the auditors to perform a presumptively mandatory auditing procedure and there are no other effective alternate procedures available. The circumstance would normally result in the issuance of:

Accepted Answer

When auditors are unable to perform a presumptively mandatory procedure and no alternative procedures are available, they lack sufficient evidence to form an opinion, leading to a disclaimer of opinion.

Question 4

If audited financial statements include a balance sheet and an income statement, but do not include a statement of cash flows:

Accepted Answer

The absence of a statement of cash flows is a departure from generally accepted accounting principles (GAAP), which requires the inclusion of a statement of cash flows as part of a complete set of financial statements. Therefore, auditors should issue a qualified report for this departure.

Question 5

Which of the following is least likely to result in an emphasis-of-matter paragraph being added to an unmodified auditor's report on the financial statements of a client that sells jewelry through a retail store?

Accepted Answer

Reliance placed upon a specialist to evaluate the diamonds is a routine procedure in the jewelry industry, and is unlikely to result in an emphasis-of-matter paragraph being added to the auditor's report. A change in accounting method (choice C) may warrant disclosure, but is not a significant issue. A decision to emphasize the client's relationship with a larger organization (choice A) is also unlikely to result in an emphasis-of-matter paragraph unless the relationship has a material impact on the financial statements. The possibility of the client being unable to continue as a going concern (choice D) is a significant issue that may require disclosure.

Question 6

Which of the following modifications of the auditors' report does not include an additional paragraph?

Accepted Answer

When there is a division of responsibility between two CPA firms, the auditors' report is modified in the opinion paragraph to indicate the shared responsibility, but it does not require an additional paragraph.

Question 7

Which of the following circumstances generally results in the issuance of a report that includes an opinion that is other than unmodified?

Accepted Answer

If the auditor is unable to obtain sufficient appropriate audit evidence, they may issue a modified opinion to indicate the limitations of the audit and the potential impact on the financial statements.

Answer: B
 If the group auditors are relying on the work of component auditors, they may issue a modified opinion to indicate that the reliance on the work of others has impacted the scope of their audit.

Answer: C
 A change in accounting principle due to a new FASB pronouncement may require the issuance of a modified opinion to reflect the impact on the financial statements.

Answer: D
 Emphasizing material related party transactions does not necessarily result in a modified opinion, but it may be disclosed in the audit report as a key audit matter or other type of explanatory paragraph.

Question 8

When a client declines to disclose essential information in the financial statements or notes, the auditor of the financial statements should:

Accepted Answer

If the client declines to disclose essential information in the financial statements or notes, the auditor should make every effort to obtain the information. If it is not practicable to provide the information in the audit report or if the client declines to provide the information, the auditor should qualify the opinion because of a departure from GAAP. This is because the financial statements are not presented in accordance with GAAP if they do not contain all necessary information. A disclaimer of opinion (choice C) is only appropriate if the auditor is unable to obtain sufficient appropriate audit evidence due to client interference, and issuing an unmodified opinion with omitted information (choice D) would not be appropriate as it would mislead the reader.

Question 9

Which of the following would most likely be an appropriate addressee for an audit report?

Accepted Answer

Shareholders are the primary users of the audit report, as they rely on it to make informed decisions about their investment in the corporation. The other options may also receive a copy of the audit report, but the primary addressee is the shareholders.

Question 10

When an adverse opinion is expressed, the opinion paragraph should include a direct reference to:

Accepted Answer

When an adverse opinion is expressed, a separate paragraph (section) should be included in the audit report which discusses the basis for the opinion rendered. This paragraph should explain the nature and size of the departure from GAAP, the reason for the departure, and the quantitative effects on the financial statements. It should also refer to the note to the financial statements which discusses the basis for the opinion, but it is not necessary to reference the Auditor's Responsibility section of the report or mention consistency in GAAP application.

Question 11

If the predecessor auditors do not reissue their audit report on comparative financial statements, the successor auditors should:

Accepted Answer

The successor auditors should refer to the report of the predecessor auditors and make appropriate inquiries and obtain sufficient appropriate audit evidence as to the opening balances and the material transactions and events that occurred during the intervening period. They should also evaluate whether there is a need to modify their opinion on the current period's financial statements. However, the successor auditors are not responsible for reissuing the predecessor auditors' report. Therefore, options A and B are not appropriate, and option C is only applicable if the comparative financial statements are not required by the applicable financial reporting framework.

Question 12

The unmodified standard audit report of a nonpublic company does not explicitly state that:

Accepted Answer

The unmodified standard audit report states that the audit was conducted in accordance with generally accepted auditing standards (GAAS), not accounting principles generally accepted in the United States of America (GAAP).

Question 13

It is not appropriate for the auditors' report to refer a reader to a financial statement note for details regarding a(an):

Accepted Answer

If there is a limitation in the scope of the audit, it should be disclosed in the auditors' report itself and not referred to a note in the financial statements. The other options can be appropriately addressed in a note and referred to in the auditors' report.

Question 14

The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading due to pervasive misstatements. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should:

Accepted Answer

The auditor believes that the new accounting principles are not in conformity with GAAP, which could lead to pervasive misstatements in the financial statements. Therefore, an adverse opinion that includes a basis for a modification paragraph disclosing the reason (the accounting change) for the opinion is the appropriate course of action. This would provide users of the financial statements with the necessary information to make informed decisions.

Question 15

Which of the following is a "registration statement" that is filed with the SEC by a company planning to issue securities to the public?

Accepted Answer

Form S-1 is the registration statement that a company files with the Securities and Exchange Commission (SEC) to register its securities for public sale. Form 8-K, Form 10-Q, and Form 10-K are other types of SEC filings, but they do not serve as registration statements for public offerings.

Question 16

Which of the following is not a difference between the audit report of a nonpublic and public company?

Accepted Answer

Public company audit reports do not have an additional paragraph specifically referring to the client's fraud prevention procedures. The other options are actual differences between public and nonpublic company audit reports.

Question 17

Which of the following accounting changes requires an emphasis-of-matter paragraph regarding consistency in the auditors' report?

Accepted Answer

A change in the method of depreciation used for a class of fixed assets is considered a change in accounting principle, and therefore requires an emphasis-of-matter paragraph in the auditors' report to address consistency. Options A, B, and D are all changes in accounting estimates, which do not require an emphasis-of-matter paragraph.

Question 18

A client has changed the salvage values of a number of its fixed assets. The auditors believe that the revised salvage values are realistic. The appropriate report on the financial statements is:

Accepted Answer

Changing the salvage values of fixed assets does not impact any other area of the financial statements, and the auditors believe that the revised salvage values are realistic. As a result, an unmodified opinion is appropriate.

Question 19

CPA Firm A has performed most of the audit of Consolidated Company's financial statements and qualifies as the group auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume full responsibility for Firm B's work. Which of the following statements is correct?

Accepted Answer

When a group auditor assumes full responsibility for the work of another auditor, they can issue a standard unmodified opinion on the financial statements, provided that all appropriate requirements and procedures have been met and they are satisfied with the work of the other auditor.

Question 20

The term "except for" in an audit report is:

Accepted Answer

The term "except for" is used in a qualified opinion to indicate that, except for the effects of the matter referred to in the basis for qualified opinion paragraph, the financial statements are fairly presented. It is not used in adverse opinions or unmodified opinions with an emphasis-of-matter paragraph. It is still considered appropriate to use in qualified opinions.

Quiz 17: Auditors Report